THE European Union says Zimbabwe’s three main political parties have made progress in implementing the Global Political Agreement (GPA) and has agreed to continue with talks to normalise relations between the 27-member bloc and the inclusive Government in Harare.

In a statement after a Zimba-bwean delegation visited Europe last week on a mission to thaw the frosty relations between Brussels and Harare, EU’s High Representative for Foreign and Security Policy Catherine Ashton said they were ready to continue with dialogue after noting progress in the implementation of the GPA.

“The EU appreciates some progress made in implementing the GlobalPolitical Agreement in Zimbabwe and remains ready to continue thedialogue and to respond flexibly and positively to any clear signalsof further concrete progress,” said Ashton.

The Zimbabwean team which travelled to Europe comprises the Minister of Justice, Legal and Parliamentary Affairs, Cde Patrick Chinamasa, Regional Integration and Co-operation Minister Mrs Priscilla Misihairabwi-Mushonga and Energy and Power Development Minister Mr Elton Mangoma.

EU’s Commissioner for Development Andris Piebalgs, who also met the Zimbabwean delegation, said the commission was committed to providing further assistance to the country.

The parties strengthened their wishes to move the political dialogue forward.

“They (EU and Zimbabwe) engaged in open and constructive discussions with the ultimate objective of progressing towards normalising relations between European Union and Zimbabwe.

“It was also agreed to intensify the dialogue in Harare,” the EU statement read.

Cde Chinamasa told The Herald on Friday that the meeting with theDutch minister was about the Dutch-owned farms that were acquired for resettlement.

“We said we would forward their concerns to the Minister of Lands andRural Resettlement,” Cde Chinamasa told The Herald.

The inter-ministerial delegation was expected back last night.

The EU-Zimbabwe dialogue started in June 2009 with a ministerialtroika meeting in Brussels and continued with an EU Troika visit toHarare last September.

Another meeting scheduled for February this year was cancelled afterthe EU delayed in giving Zimbabwe the date for the politicalengagement.

The meeting was supposed to be held before the EU extended the illegal sanctions against the country.

The trip to Europe was deferred again in May after volcanic eruptionsin Iceland filled the skies in Europe leading to a number of flightsbeing put on a temporary freeze.

Zimbabwe has been reeling under the illegal sanctions that wereimposed on the country in 2002 under the EU’s Article 96 thatprohibits government-to-government co-operation.

Debt crisis looming

Market Watch By Brains Muchemwa

THE dollarisation of the Zimbabwe economy eroded many othereconomy-wide risks that haunted corporates for almost a decade, fromprice controls to the inaccessibility of foreign currency.

With the much-celebrated stability, a new crop of risk has emerged,and that relates to the debt crisis at both the national and privatehousehold level.

A decade of high inflation made borrowing a lucrative pastime inZimbabwe. Zimbabwe dollar asset prices kept rising whilst the realcost of debt diminished rapidly as the central bank kept printing moremoney to cover the fiscal deficits.

The subsequent inflation impoverished not only the Government but the households and corporates and the increasing despair was met byeconomy-wide subsidies, which ignited more inflation. Indeed borrowers were the biggest beneficiaries of inflation.

By 2008, s/he who borrowed the equivalent of ZW$1 on January 1 2008 had to pay back ZW$0,01 by December 31 2008 to the bank in settling the whole debt! The borrowers, including the central Government, were the biggest winners whilst the consumers and the economy at large edged towards bankruptcy.

In May of 2007, the Government borrowings were about 18 percent ofbank balance sheets and, by December 2008, that had evaporated toalmost nothing! Only fiscal moralists would not marvel at these greatworks of inflation in reversing the debt burden on central Government.

And indeed the death of the local currency sealed the fate of banks,pension funds and insurance companies that held the bulk of Government debt and today our Government is better off with only US$8 billion debt overhang.

The moral opinion that the Government created inflation and was among the major beneficiaries is therefore very hard to dismiss. Withwinners equally come the losers and as the borrowers, including theGovernment, benefited from inflation, the banks and ordinary consumerlost their capital positions in real sense. Real wage rates plummeted,and indeed, the banks were left clutching to capital in the form oflargely investment properties and equipment.

The tables have turned. A new crisis is lurking in the shadows of theoptimism. And that relates to burdening real and expensive debt thatmay, if corporates are not careful, infect balance sheets and define anew chapter of corporate bankruptcy.

In a bid to revitalise a weak balance sheet and inject workingcapital, corporates in Zimbabwe have plunged into fresh debtarrangements. Physical capital formation had almost ceased for overseven years in Zimbabwe and, considering the pace of globaltechnological developments that swept across the past decade, mostproduction processes are now outdated and, more importantly,inefficient.

The domestic unit costs of production are, therefore, not competitivewhen compared to the rapid advancements and competition from low-cost producers such as China and equally competitive producers like South Africa.

Inasmuch as the Zimbabwean corporates could have enjoyed the borrowing binge of the past four years, the exchange control regulations and the associated scarcity of foreign currency meant that the cheap credit could only do but very little for the borrowers in terms of enhancing capital goods, hence key components of balance sheets remained weak.

Today’s new race for debt, thanks to the reluctance by banks to lend,has been influenced by the notion, misplaced at times, that theexisting operational structures are still profitable and corporatescan easily turn to producing profitably if they get working capital.

Unfortunately most corporates are finding the going tough, and therecent results coming out of some of the listed companies arerevealing how septic corporates balance sheets are getting by the day.With credit so pricey due to the current liquidity crunch, interestcost is proving to be a huge operational burden for many companiesand, unfortunately, the debt heaping on the balance sheets isincreasing at a rate that will soon compromise the solvency of manycompanies.

On the other hand, the rising wage levels are adding to the woes onthe cost functions, implying therefore that worker productivity willbe taking a more important role in corporate planning going forward.In the past only US$100 could pay all wages, water and electricity fora medium-sized company as the magical “burning” of foreign currencyimmensely benefited owners of capital.

Now the times have changed and all these costs are real on companies’ operation structures, and hyperinflation, then “father miracles”, is no more to do the “Christmas tricks”. Just as the miraculous hyperinflation Christmas tree dried, so has the subsidy mentality where Bacossi and Aspef created artificially low operating cost structures at the nationwide expense of even more inflation.

Interrogating the debt markets to revitalise operations has become onelast option for companies stuck with rising real operational costs andthe need to restart operations that had been stopped for years. And itis indeed the way out, but equally with landmines.

Loans to the private sector stand at 30 percent of GDP in Zimbabwetoday, and considering the shallow depth of the financial market andindeed the liquidity crunch, Zimbabwe’s private sector is highlygeared compared to Zambia with only US$1,6 billion in loans, about 8percent of GDP and Tanzania with loans at 15 percent of GDP.

However, upon factoring in the relative potential of Zimbabwe’s GDP,considering very low capacity utilisation below 45 percent in industryas well comparing with the debt-addicted South Africa where privatesector debt is 90 percent of GDP, the temptation to encourage gearingremains very high in Zimbabwe.

This temptation may prove to be rewarding for those that will be ableto restructure operations and processes to embrace the dynamism andindeed thin-margin environment that is shaping out for sectors such asbanking, manufacturing, retail, hospitality, insurance and, of course,those other sectors competing directly with low-cost global producers.

And contracting debt in such sectors, more so expensive debt obtaining in Zimbabwe, the survival chances narrow with each extra day it stays on the balance sheet. For central government, the fate has been decided already.

The Government debt overhang, at about US$8 billion, is stagnatingeconomic growth already, and indeed, some corporates are falling intothe same trap as central government.

The recent raid on RBZ assets by numerous creditors bears testimony to real debt challenges facing the Government where its assets are being stripped and, without a doubt, in the same fashion, more foreclosures will be coming to corporate doorsteps.

Shunning debt completely is not a viable option for Zimbabweancompanies, considering the poor capital structures after a decade ofinflation and the need to carry on but, equally, contracting debtblindly is not the answer in restructuring of balance sheets.

A delicate balance would have to be struck and, in the process, somewill likely lose the balance completely and plunge into bankruptcy.

The intoxication and resultant addiction that comes with debt is sohard to fight. The recent global financial crisis tells the completestory.

For the banks that are going to lose money in foreclosures, learningfrom South African banks ABSA and Standard Bank, that had impairment charges of US$1,2 billion and US$1,6 billion respectively in 2009, could provide some valuable lessons.

The lessons will, unfortunately, result in more stringent lending and,in the process, constrict the credit flowing into the economy as isthe case currently, compounding the bankruptcy fears.

These are difficult times. Can the corporate sector rise to the challenge?

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Pan-African News Wire

The Pan-African News Wire is an international electronic press service designed to foster intelligent discussion on the affairs of African people throughout the continent and the world. The press agency was founded in January of 1998 and has published thousands of articles and dispatches in newspapers, magazines, journals, research reports, blogs and websites throughout the world.
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PANW editor Abayomi Azikiwe is often solicited by various newspaper, radio and television stations for comment and analysis on local, national and world affairs. He serves as a political analyst for Press TV and RT worldwide satellite television news networks as well as other international media in the areas of African and world affairs. He has appeared on numerous television and radio networks including Al Jazeera, CCTV, BBC, NPR, Radio Netherlands, the Australian Broadcasting Corporation, South Africa Radio 786, Belgian Pirate Radio, TVC Nigeria and others.